Time Arbitrage as a Competitive Advantage

In the 1950s, the average holding period for stocks was over seven years. Not surprisingly, that number has been falling ever since—current estimates put the holding period at around 4-8 months.

The vast majority of investors are focused on the next quarter or the next year, which is mostly just noise in terms of what really matters to a company’s value. It’s not uncommon that a company’s terminal value is 70-80% of what it’s worth today. If how a company will perform 10-20+ years from now makes up most of its value, then the most important factor when choosing companies to invest in is how durable their competitive position is over the long-term, which often has very little to do with near-term results. Even so, it’s not a surprise that so much of Wall Street focuses on the short-term.

Most money managers report their results on a quarterly or monthly basis (some even more often than that), which encourages their clients to focus on short-term results. Way too many people want to get rich quick, so short-term underperformance results in money getting withdrawn. The result is money managers who are incentivized to care about their own monthly or quarterly results, which makes them pressure CEOs to perform over the short-term.

In addition, most public company CEOs give quarterly and annual guidance. Following that, most Wall Street analysts are going to build their models to be roughly in line with that guidance (I’m definitely guilty of that). Thus, everyone’s near-term valuations are going to be quite similar and the stock will mostly reflect that.

However, CEOs rarely give guidance past one year and when they do, it’s mostly high level (e.g. a 5-year revenue target). Because of this, those analyst models only really diverge after year one and they will continue to diverge more and more the further out one looks.

Just as important, artificial intelligence is only going to continue to overtake the trading world. I have little doubt that machines are far better than humans at analyzing charts, price data, and short-term changes and predictions. But it’s much harder to automate long-term stock predictions, where things like shareholder friendly CEOs, industry dynamics, and competitive advantage durability are far more important.

If everyone, and everything, is focusing more on the short-term, I think the logical thing to do (for an individual with limited resources) is to focus on the long-term. The amazing part of this is that as long as Wall Street focuses more on the short-term (which is a trend I don’t see reversing anytime soon), the advantage of long-term investing will increase. As investing continues to get more efficient (thus, harder to outperform), I’m not aware of many advantages an investor can have that are actually getting more attractive over time.